Apple, Samsung capture all of industry's smartphone profits

Samsung grabs more of the industry profit pie from Apple, but the broader question is why any company would want to make smartphones given there's no bottom line.

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Credit: ZDNet

Apple accounted for 75 percent of the smartphone industry's profits in the second quarter, but that's down from more than 90 percent a year ago due to Samsung's Galaxy device lineup, according to Canaccord Genuity.

Samsung's Galaxy S7 launch and the Note 7 follow-up likely indicate that profits will continue to do well, said Cannaccord Genuity analyst T. Michael Walkley in a research note. The other item that may ding Apple's industry profit is that customers are delaying purchases ahead of the iPhone 7 launch. Add it up and Samsung has captured more than 30 percent of industry profits in the second quarter.

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Apple industry profits are sliding -- but keep in mind that the company is capturing profit share with 11.7 percent smartphone unit share in the second quarter. Walkley said that Apple's industry profit share is at its lowest point since the second quarter of 2014 before the iPhone 6 launched.

While this tale could revolve around Apple vs. Samsung, the larger question is this: why would any company want to make smartphones? Let's get real. All the profits go to Apple (high end) or Samsung (high end and scale). The rest of the players in the market don't make money and get disrupted by whatever vendor is flavor of the month. Remember that Xiaomi was supposed to be the next big thing in China and elsewhere, but it's now being disrupted by Oppo and Vivo. A quarter from now Oppo and Vivo will be thumped by some smartphone manufacturer we haven't heard of yet.

Fortunately for Apple, it has a large installed base and an ecosystem that can result in services revenue. Samsung has the base, but the services need some work. The rest of the players in the field (LG, HTC, and Lenovo) lack the lock-in, loyalty, and/or services.

The upstarts that are making life hell for the incumbents aren't included. But given that these challengers are using price as a weapon, it's safe to assume that operating profits aren't a priority.

Walkley noted:

Given the ramp of Chinese OEM smartphone volumes and particularly strong 2015 smartphone market share gains for Huawei, we note our industry profit analysis excludes a large portion of this group of OEMs gaining an increasing share of the smartphone market profits due to the lack of available and comparable profit metrics. While this likely overstates Apple's profits, we note some leading smartphone OEMs in China are growing global market share through aggressive pricing strategies limiting near-term profit levels. Inside the Greater China region, share has shifted to Chinese OEMs as well. In fact, in Q2/C15 Apple was number 1 vendor of smartphones in China, and we now believe in Q2/C16 Apple fell to the number 5 vendor behind Huawei, OPPO, Xiaomi and VIVO.

Here's a condensed version of Cannaccord Genuity's smartphone profit share for the industry.

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Credit: Cannaccord Genuity

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